High yielding pair hit by dividend worries

The dividend prospects at high-yielding pair Stobart Group and McColl's have been hit following trading updates. Graeme Evans reports.

Two high-yielding stocks were marked sharply lower today when Stobart Group cut its dividend and the convenience store chain McColl's Retail Group appeared to pave the way for a similar move following its latest profits warning.

Stobart's decision to reduce its Q4 dividend to 1.5p a share wasn't directly related to trading. Rather than paying shareholders using funds raised from the sale of non-strategic assets - as it has done since March 2017 - the aviation, energy and infrastructure business will now put these proceeds towards investment opportunities and a stronger balance sheet.

This will mean that the total dividend paid in the current financial year will be 15p a share, rather than the 16.5p a share seen the previous year when Stobart yielded in the region of 6.5%. Stobart shares were 9% lower at 176.5p, taking the FTSE 250 Index company back to a level last seen at the end of 2017.

However, any disappointment among investors is likely to be offset if the dividend cut means that there are funds available to pursue an increasing number of potential projects with attractive returns on capital.

Stobart points to expansion opportunities at Southend Airport following commercial agreements with Ryanair and easyJet. At Stobart Energy, the company is looking at building, owning and operating renewable energy plants that will generate long-term, sustainable operating cashflows.

The outcome of a detailed capital review will be revealed alongside the company’s March trading update. Stobart said:

"The board recognises the importance of dividends to its shareholders and will update the market accordingly, once it has completed the capital review."

At McColl's, the neighbourhood retailer with an estate of more than 1,500 stores, trading continues to suffer from supply chain disruption following the collapse of wholesaler Palmer & Harvey a year ago.

A new partnership with Morrisons has filled the gap, but McColl's admits that the speed of the transition has created significant challenges. In addition, competition in the grocery sector remains fierce, while it also faces significant cost pressures.

This means that full-year underlying earnings are now likely to be around £35 million, compared with reduced guidance of £44 million in a July profits warning.

While there was no mention of the dividend in today's update, broker Liberum now thinks that this year's total pay-out will be cut to 8p a share from 10.3p previously. The stock has been trading with a yield of 8.5%.

Liberum has retained its "hold" recommendation but cuts its price target from 150p to 100p. Shares were trading at 83.5p today following a slump of 30%.

There was some areas of encouragement, however, with McColl's saying it had reduced net debt by more than expected to around £100 million. It has also entered into revised banking arrangements.

CEO Jonathan Miller said 2018 had been a very difficult year for the business but that plans were in place to boost longer-term prospects.

He added:

"Important to our future success will be continuing to develop our partnership with Morrisons, alongside our plans to enhance our neighbourhood convenience offer by improving the quality of our estate and our overall customer experience."